EU takes aim at London’s euro business

Brussels launched an attack on London’s role as Europe’s financial center.

A four-page European Commission “communication” released Thursday has thrown into doubt whether the U.K. will be able to retain its almost €1 trillion euro-clearing business, threatening London’s status as the de facto financial hub of the EU.

It appears to be the first shot fired in the financial services battle following the U.K.’s Brexit vote, with the EU declaring war on euro clearing.

Right now, London handles €927 billion worth of euro-denominated transactions each day, and as much as 75 percent of euro-denominated interest-rate derivatives are cleared at clearing houses in the U.K. Clearing involves an entity standing in the middle of two parties to a transaction, with the aim of managing the risk that arises if one party cannot make required payments.

Although the U.K. is outside the eurozone, it is subject to the EU’s landmark derivatives legislation, the European Market Infrastructure Regulation (EMIR), and to EU supervision.

But after Brexit, that would all change, and the EU is not content to sit back and watch its currency being traded in a non-member country and without the ability to intervene in case of financial instability.

“The fact that euro clearing is currently taking place in London and thereby outside of the eurozone is an anomaly that cannot be maintained after Brexit,” said Markus Ferber, a German conservative MEP and vice chair of the European Parliament’s economic and monetary affairs committee. “On crucial issues of financial market stability, the EU must not rely on the mere goodwill of third-country authorities.”

Although the Commission’s communication is not an official proposal for change to EMIR, the EU’s executive arm plans to publish something in June.

Brussels’ concerns are likely to lead to legislative action putting forward two potential options for U.K. clearing houses. They can either expect to submit themselves to more supervision from the EU, despite having Brexited, or watch the multibillion industry relocate to another place within the bloc.

Brussels’ concerns are likely to lead to legislative action putting forward two potential options for U.K. clearing houses.

“Following the foreseen withdrawal of the United Kingdom from the EU, a substantial volume of transactions denominated in euro would cease to be cleared in the EU and would no longer be subject to … EU supervisory architecture,” the Commission document notes.

In a response to the Commission’s announcement, U.K. Chancellor of the Exchequer Philip Hammond said: “London is the world’s No. 1 financial center with high standards of financial supervision, including longstanding cooperation with EU institutions. This benefits the entire continent. We trust everyone in the negotiations will see the value in not undermining that.”

Any move to limit euro clearing in the U.K. would be entirely a political decision as a result of Brexit, but the topic itself is not new.

The European Central Bank attempted to take a pop at Londona few years ago, arguing in a location policy that any significant euro-clearing business should be handled in the eurozone.

But in a 2015 ruling, following a U.K. complaint, the EU’s General Court sided with the U.K. Instead of remarking on potential financial stability concerns of euro clearing taking place outside the eurozone, the court ruled the ECB had no authority over clearing in the EU.

Specifically, the court declared that the ECB “does not have the competence necessary to regulate the activity of securities-clearing systems.”

The Commission, by contrast, holds the pen on rules for clearing and looks set to take full advantage of those powers. If so, it would be a post-Brexit-vote move that’s as political as it can get in Europe’s financial services arena.

The U.K. financial industry recognizes that but makes a case for protecting mutual interests. “A forced re-location of euro clearing would lead to disruption, uncertainty and fragmentation of the market,” said Miles Celic, chief executive of TheCityUK, a City of London interest group. “A potentially less liquid, and less competitive EU market would result in higher costs for European savers and investors. … This is in no one’s interest and is entirely avoidable.”

But it’s not guaranteed that any legislative action would lead to euro clearing being driven out of London.

EU regulators such as the European Securities and Markets Authority and the ECB could reach an arrangement whereby they are granted enhanced powers over clearing houses despite those firms being outside the area of EU regulatory remit. The threat to remove clearing from the U.K., however, is sure to be a key item in the inevitable Brexit horse-trading over the coming months.

For London, the loss would be devastating. Some estimate it would cost the city £63 billion. The industry is the centerpiece of banking in the City of London, and any clearing house departures could be followed by large financial institutions and with it, tens of thousands of jobs.

Jester

And say goodbye to the Euro as a reserve currency…I do not think so. The reality will be that any country outside of the EU will be allowed to facilitate Euro clearing subject to regulation. The discussion/arguments will be regarding what that regulation is – which will need to include all financial centres not just London…it becomes a global discussion…….and BASEL rules I suspect may come into play in achieving global regulation on currency clearing regulation…not just for the Euro.

Posted on 5/4/17 | 3:34 PM CET

Steve

When politics overrides business sense it rarely works out well. Hey-ho. There will be plenty of this type of thing.

Posted on 5/4/17 | 3:59 PM CET

Dee

Complete and utter nonsense. The only other financial centre that could potentially handle Euro Clearing is New York, but the costs would be prohibitive. This is why Barnier is trying to get the City of London a separate deal behind closed doors in secret talks. The City of London also handles all of the loans for the EU and raising finance amongst a whole host of services and nowhere on the continent is able to do this. So this artucle plays on peoples ignorance of finance on the scale we are talking about and Barnier is having to educate his colleagues in the EU. It is all going to be very entertaining.

Posted on 5/4/17 | 5:23 PM CET

fram

@Steve, so true, so true, starting by opposing what the British business community in unison wanted in first place…

It was hard to swallowing for many in the EU to have all the Euros traded in a country that had an interest on having a unstable Euro but to claim now that the EU should leave the financial sector in the hands of a country that is not even a member… I would like to know who else would do that, Puerto Rico?!

@Dee, you are right, no EU city is ready to host that now, but no one says it could be ready in 2 years time. The only challenge would be prioritizing in the human capital. I presume 1/2 of the workforce will be willing to relocate and them we have another 1/2 to search. Both London and the EU will agree in a longer transition than 2yrs, but the move will eventually happen.

Posted on 5/4/17 | 5:49 PM CET

wow

@fram

You need to understand that all financial centres in all the world can clear all currencies to understand why ‘currency nationalism’ as the Financial Times called it, it not even something North Korea would suggest.

The UK clear USA Dollars

New York clears Great British Pound

The whole thing has been completely discredited everywhere except Guy Verhoffnutter who discusses it sometimes. He is not normal.

We can understand because we have the British Pound which is the world’s third reserve currency, and it is cleared and traded wherever it needs clearing and trading!

Only crazy people would suggest clearing in one country!

Also we are talking about euro clearing only it is not the whole business of financial services you know! It’s a very specific very small area in one currency only.

927 billion a day is the money that goes through London for this specific action, not the actual profit UK sees on it’s GDP figure! You’re just talking about moving money through a bank to another bank, like when somebody buys something from a shop. Only a tiny tiny percentage (if any) is any profit.

Posted on 5/4/17 | 6:18 PM CET

wow

Politico should not really report on financial services matters as it is not qualified. Go to the Financial Times or Wall Street Journal.

Posted on 5/4/17 | 6:19 PM CET

fram

@Wow, this is only reporting on known political declarations on the financial sector’s location future, not making any financial forecast.. But yes, for informed financial and economic forecast do turn to those periodicals… thing that many leavers disregarded.

Posted on 5/4/17 | 7:09 PM CET

Gareth Cooke

Yes can one can do it through HK,Singapore,NYC already and course use of English law will not be allowed through the UK on synthetics sold via tiny Paris or dweeb frankfurt and course next thing coming from the EU empire the Tobin tax which berlin and Paris would love

Posted on 5/4/17 | 7:47 PM CET

Carl Mills

Well said @wow

Posted on 5/4/17 | 8:19 PM CET

Honest Dave

EU still fail to realise you can not force the location of clearing. It’s a global market and business is done where is most convienent. Euro transactions tend to have a foreign currency on the other side. You can not say any deal/trade involving euro must be in the EZ. Seems like the EU27 are under illusions.

Posted on 5/4/17 | 8:28 PM CET

Honest Dave

@fram – I think wow corrected most of your points very well. Just wanted to highlight one apparent misconception among the EU27 – the UK will only agree to an implementation phase when a trade deal has been agreed in principal. Ignore the nice words, the UK will not allow a transition phase purely for the benefit the EU. Without a deal expect a very abrupt end to Brexit which will be extremely bad for both sides.

Posted on 5/4/17 | 8:35 PM CET

Rudy

A typical EU decision here would be that London keeps on clearing euros a couple of days per week and the other days we would do it in Frankfurt every even week number and in Paris every odd week number.

Posted on 5/4/17 | 8:36 PM CET

S.Alexander

@wow

This Euro clearing story is old and yes, even covered in FT. If I recall correctly an article november last year ended with one UK high offcial saying: relocatiom of clearing to Europe it’s not a matter of IF but a matter of WHEN. Look it up.

On the other hand, it really is up to Macron. His Rothschild and Goldman buddies will have a strong influence on the issue. Or the othwer way around – too early to tell.

In fairness, the clearing will not move if the clearers don’t want to. That is a fact. But, as always, through regulations one may make life better for continent located clearers.

Posted on 5/4/17 | 8:44 PM CET

S.Alexander

@wow

By the way, the Macron reason is why I took the symbolic bet in the other article with a german being absolutely sure EBA would move to Germany. It’s Paris 100%. Unless LePen pulls a stunt and wins.

Posted on 5/4/17 | 8:47 PM CET

EUFed

Of course the EU27 need to put a stop to this nonsense in London, and bring the “tens of thousands of jobs” to EU soil, so that EU citizens can benefit from those job positions, taxes and profits this would bring, instead of leaving a non-EU country to benefit from the EU’s currency.
This should not even be something that’s up for discussion, and the top EU officials should be clear that they are not gonna sell out and outsource the EUs financial industry to the UK.

Posted on 5/4/17 | 11:42 PM CET

Franny

@EUFed

You were found to be incompetent before, what’s changed?

Posted on 5/4/17 | 11:52 PM CET

Gareth Cooke

EUFed

Do you think that world revolves around the EU empire EZ can’t even sort out its own bankrupt banks think forthcoming Italian banking crises and Greece 4 bailout just name a few and as to clearing yes you can do it through Asia and the USA as well and of course good old EU commissioner who could not organise a pppp up in a brewery has thought of it in 3 ways before he can even kick can so don’t worry in one form of another we be clearing for bankrupt EZ bankrupt empire old chap

Posted on 5/5/17 | 12:42 AM CET

Fiona

@EUFed

You may wish to consider who CAN do it before deciding who will. Good luck to you.

Posted on 5/5/17 | 1:17 AM CET

raul

if the UK is allowed to keep Euro clearing, the EU is dead

Posted on 5/5/17 | 2:22 PM CET

Jodocus4

I think that #Jester has so far provided the most coherent input, even if I don’t quite agree with his views.

As for #Dee, #wow, #Honest Dave, and others: the proposed measures are part of the existing EMIR regulations (google it) on clearing and will apply in the same way as EMIR regulations do now.

EMIR rules were dreamed up after the banking crisis and stipulate that clearing houses must supply the EU regulators with a fairly detailed account of their trades. Including who was involved in what trades when and for what amount. City firms are currently bound by those rules since they are in the EU.

For that matter, City firms will continue to be bound by all relevant EU regulations (plus any changes or updates) after Brexit or their Euro trading business will (be made to) cease to be viable.

Since after Brexit, City firms will only be under UK law, the only way for such agreements to hold water, is the UK binding itself (by treaty, so that it can’t be easily rescinded) to follow EU regulations on this subject. In other words: the UK will have to continue to observe EU rules, and will change from a partner with a lot of influence on those rules (indeed with de-jure and de-facto veto powers, as it has shown on various occasions) into a rule-taker with almost no influence on the content of those rules. That’s Brexit for you.

Considering that the UK has stated publicly that it does not wish to do so, the logical outcome would seem to be that the Euro clearing business leaves London.

Please note that this has nothing to do with forbidding anyone to clear Euros. Nobody will stop a Chinese party from clearing EURO transactions of a few thousand Euros between other Chinese parties in a shady backroom somewhere in China … but EU regulations really will apply to trades where at least one of the parties falls under EU jurisdiction or can be made to comply with EU rules, Which is to say, the vast majority of trades. Enough to make it infeasible for London’s financial firms to stay in the Euro clearing business unless they comply.

Sorry, but there it is.

The only remaining question is: what would it cost the EU if it were to make life difficult for City firms to clear all the Euro transactions they do now.

I don’t know the answer to that.

But just look at it from the EU point of view: consider the prospect of having the UK holding the reins on clearing rules and consider the difference between the UK’s policy on trade rules and the EU’s policy. It might just be worth the EU’s while, and there is no doubt it can enforce it.

Posted on 5/5/17 | 3:20 PM CET

Giuseppe Marrosu

Some questions to the author and readers:
1) “as much as 75 percent of euro-denominated interest-rate derivatives are cleared at clearing houses in the U.K. “. How much of the world total pound-denominated interest-rate derivatives are cleared in the EU? How much outside the UK?
2) How much dollar-denominated interest-rate derivatives are cleared outside the US?
3) How much yen-denominated interest-rate derivatives are cleared outside Japan?
4) Would it be OK for the UK to somehow limit pound-denominated interest-rate derivatives cleared in the UK to 25% of the world total and have 75% of them cleared in the EU as a return for the reciprocal?
5a) “For London, the loss would be devastating. Some estimate it would cost the city £63 billion.”
Which means the potential loss for the others now is £63 billion?
5b) Giving that this business is being generated by the existence of the Euro, wouldn’t it be nice if most of those £63 billion made their way back into the Eurozone?
6) Is it safe for a community to have a somewhat hostile foreign Country to host 75% of those transactions?
Thank you.

Posted on 5/5/17 | 5:12 PM CET

Giuseppe Marrosu

The thousands of jobs that the UK would lose are thousands of jobs they keep thanks to the EU and the Euro.
We in the Eurozone will gladly welcome those thousands of jobs where they belong: in the Eurozone.
We can do it, we should do it, and if we’re smart we will. After all the EU is supposed to serve EU interestes, not create jobs in the UK.